Home buying and mortgage stories are always a poplar topic on personal finance blogs, which is great for me because I love reading and talking about real estate. I LOVE it. I love buying it. I love owning it. I love renting it out to other people. Here’s a big WOOT! for real estate!

Of particular interest to me this week is the first ever “Smart Money Debate” at Ready For Zero. It features our friends Michelle from Making Sense of Cents and Carrie from Careful Cents. The debate asks the question, which is better – buying a house or renting? Michelle argues why you should buy a home while Carrie provides her views about why she prefers renting. I actually think that they are both right. Here is why.

Why Buying a House is Better

Let me begin by saying this: I believe that in almost all circumstances buying a house is a better financial move for you than renting is. Why you ask?

1) You are building equity.

Here is the biggest and most persuasive argument. While rent payments help to fund equity in somebody else’s property, mortgage payments build equity in your own house. Quick translation: you are using your money to build your net worth rather than your landlord’s.  Sure, you have to fix things from time to time. Occasionally, you have to make major repairs, like putting on a new roof.  However, the thousands of dollars a year that you spend in rent is paying for somebody else’s roof.  At the end of the year, while I may have paid slightly more in mortgage payments than you did in rent, at least I am slowly becoming the true owner of my property. On the other hand, as a renter, your money has been used to buy ownership in absolutely nothing.

2) Real estate is a tangible asset.

Look, I love money. I love it in all of its forms. I have money in the bank. I have money in the stock market. Sometimes, Holly even lets me carry money in my wallet. Still, all of that money is simply paper. It is a promise of value. If the dollar was to collapse, if the stock market was to implode, if the economy went completely “belly-up” tomorrow, much of that money would be gone. It would be lost. The only reason that it has value is because of the promise that backs it up.

On the other hand, real estate is a tangible asset. It is something that you can feel, something you can touch. That is why it is called “real” estate. Land and houses will always have some value because they are able to be lived on or in. There are very few things that we are unable to make more of, and land is one of those things. Because of that, it has true value. Regardless of what happens to my paper money, I find comfort in knowing that I will still have a house to live in.

3) The house is YOURS.

This is kind of a hokey reason, but owning your own house just makes you feel like more of a grown-up – at least it does for me. It breeds a certain kind of personal responsibility.  You are now in charge of the property in which you live. It is up to you to take care of it. Nobody is going to come and cut your lawn, trim your trees, or bail you out of problems. It is up to you and nobody else.

Besides, do you still want to be renting when you enter retirement? What happens when your landlord raises the rent when you are 65? Do you move? Do you go back to work? Do you beg your kids for help? No thank you. I’ll stick to home ownership.

Why Renting May Be the Better Choice For You

While owning a house is clearly my preferred choice, I wouldn’t recommend it to everybody. Here are some reasons that renting may be a better option for you.

1) You can’t afford to buy a house.

This should be a pretty obvious one, right? Simply put, if you can’t afford to pay a mortgage on a house that you’d like to buy, you shouldn’t do it. Living in the Midwest, this isn’t something that I think about too much.  However, if you live in a city like San Francisco or New York, buying a house can be a tall mountain to climb for a lot of people.  In my opinion, your mortgage payment shouldn’t be much more than 25-30% of your take home income. If it is more, you are living too close to the edge of your means for my taste.

While not being able to afford the mortgage is a fairly obvious reason to rent, there are other expenses attached to home ownership that may not be quite as obvious.  For instance, being a homeowner means that you have to pay property taxes.  As I mentioned above, you also have to have money to make repairs.  Furthermore, you need to be careful not to make yourself house poor. While this includes not spending too much on your actual mortgage payment, it also means not buying such a huge house that you can’t afford the utilities – among other things.

2) You are a “House Hopper.”

Maybe you are young and transient, not knowing where you want to settle down. Maybe you aren’t young, but you just like to move into “bigger and better” houses when your income allows. Either way, you might be a “house hopper.” If that’s the case, renting may be a much better deal for you – especially if you are buying houses using 30-year mortgages.  Why?

When you purchase a house using a mortgage, the interest you pay is loaded heavily toward the front of the loan. The further you are along in the repayment process, the less you will owe each month in interest. Therefore, if you do not stay in the house for an extended period of time, you will have built very little equity.  Essentially, you have just “rented” the house you “own” from the bank.

Furthermore, when you hop to your “bigger, better” home, choosing to replace your 30-year mortgage with another 30-year mortgage is a risky proposition. In theory, real estate should increase in value. However, if the value of your house a) increases very little, b) holds its value but does not increase, or c) decreases in value, you could be in for a rude awakening. When it is time to sell your home so that you can hop to the next one, you will now have to pay the difference between the sales price and the balance owed on the loan to the bank. Furthermore, you will also have to pay for your closing costs.  So now, not only do you have zero equity in a house, you may also be out thousands – even tens of thousands – of dollars. You would have been better off renting.

3) You will soon be able to pay cash for a house.

Cash you say? Nobody pays cash for a house.  Well, despite rumors to the contrary, it is possible.  If you are debt free and saving money like a rock star, you really can buy a house with cash. You may have to sacrifice by living in your apartment for an extra couple of years, but think about how awesome it would be to own your house free and clear from day one! Think of all the money you could save without a mortgage payment. Now THAT is some financial freedom!

As you can see, while I believe that owning a house is clearly the best option for most people, it is not always the right choice for you. Whether you should rent or own largely depends on the facts of your personal situation. Hopefully, these tips have helped you decide what decision is best for you!